What is the Sinking Fund and how does it help the States Government?

 

What is the Sinking Fund? A sinking fund is a kind of fund in which a fixed amount is deposited which can be used to repay the debt in future. It is also called Debt Remittance Fund because the amount deposited in it is used to repay the debt in future and the government or the company does not have to suffer much in repaying the loan.

 

It is often heard in their reports that so many crores of debt have been incurred on the Central Government or the State Government or any company. In fact, this debt is incurred on the central government or the state government because they work to increase the welfare of all the people and not to earn a profit. After a few years, governments have to repay these loans with interest. To make a sinking fund, according to its convenience, a certain amount is deposited every month, which after a few years becomes so much that it becomes useful to repay the debt. Savings account in the bank is also synonymous with syncing fund account.

 

The 12th Finance Commission (2005-10) recommended the creation of the Sinking Fund. This fund is different from Consolidated Fund of State and Public Account. This Finance Commission also said that the money deposited in it should be used only to repay the debt of the state government and not for any other purpose. The Consolidated Sinking Fund in India was established by the Reserve Bank in 1999–2000 to enable states to repay their debts. At present 23 states have established consolidated sinking fund. This fund of states is managed by the Reserve Bank.

 

Why is a sinking fund created? If it is talked about in the context of a state government, it is made so that after the withdrawal of one government, the financial burden will be reduced on the future government. Since governments keep changing in democracy, if the present government incurs too much debt on itself, then the responsibility of its payment will fall on the future government. Therefore, every state government deposits 1% to 3% of its total debt in a consolidated sinking fund so that the loan/bond payment that completes the maturity period in future can be repaid and the government has not declared a defaulter.

 

If, for example, the Government of Madhya Pradesh issued 300 crore bonds for a period of 15 years (2020 to 2035). This means that the government will have to pay 300 crore rupees to these bondholders in 2035, and if the interest of 150 crores is also added to it, then the government will have to pay 450 crores in 15 years. Therefore, the government collects 30 crore rupees in the sinking fund every year to deal with this responsibility. This means that in 15 years the government would have already deposited Rs 450 crore in this fund by 2035 to repay this debt. It is thus clear that with the help of this consolidated sinking fund, the state government has fulfilled its responsibility without any hassle.